P3- UNDERSTANDING PUBLIC/PRIVATE PARTNERSHIPS

P3-UNDERSTANDING PUBLIC/PRIVATE PARTNERSHIPS

Daniel M. McRae, PartnerSeyfarth Shaw LLP1075 Peachtree Street, N.E.Suite 2500Atlanta, GA 30309404.888.1883404.892.7056 [email protected]@danmcrae.info

August 201315746499.1

P3 = Public/Private Partnership

But What Is That?According to the National Council for Public-Private Partnerships, a P3 is defined as:“A contractual agreement between a public agency (federal, state or local) and a private sector entity. Through this agreement, the skills and assets of each sector (public and private) are shared in deliveringa service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the service and/or facility.”

©2013 Seyfarth Shaw LLP2 |

PRECEDENTS FOR P3

• P3 IS NEWLY POPULAR• BUT ITS ORIGINS GO WAY BACK

• ECONOMIC DEVELOPMENT• PUBLIC INCENTIVES FOR PRIVATE PROJECTS

• CASH• GRANTS

• IN-KIND• EXAMPLE- SITE PREPARATION

• OPERATIONAL• PROPERTY TAX ABATEMENT


“BONDS FOR TITLE”- GEORGIA P3 FOR ECONOMIC DEVELOPMENT

4 | © 2013 Seyfarth Shaw LLP

DCA/OGA

DEVELOPMENTAUTHORITY

(issuer, lessor)

First – transfer title to project

COMPANY(bondholder, lessee)

Fourth –make grant

Second – issue bond, bond lease, purchase option

Third – pay rent

Fifth – pay debt service to repay bonds and grant

proceeds to pay project costs

FORMAL P3

OUTSIDE ECONOMIC DEVELOPMENT, P3 IS MORE FORMAL

• THE PUBLIC SECTOR IS AN OWNER, OR• THE PUBLIC SECTOR SUPPORTS A

PRIVATE ASSET TO ACHIEVE A PUBLIC GOAL• SOMETHING OTHER THAN ECONOMIC

DEVELOPMENT• THERE IS NO “COOKBOOK”

• P3s ARE ALL DIFFERENT©2013 Seyfarth Shaw LLP5 |

P3 GOALS DRIVE THE OPPORTUNITIES

• BIG, REVENUE-GENERATING P3 PROJECT• PUBLIC SECTOR NEEDS IT SERVES

ARE TYPICALLY EITHER-• “MONETIZATION” OF EXISTING

ASSETS, OR• AVOID/MINIMIZE CASH OUTLAYS FOR

NEW CAPITAL PROJECT OR OTHER NEEDS


“MONETIZATION” OF EXISTING ASSET

• MONETIZATION USUALLY OF INCOME STREAM, NOT OF TITLE• EXCEPTION: SALE-LEASEBACK• EXCEPTION: PRIVATIZATION

• TRANSACTION YIELDS CASH TO PUBLIC SECTOR EXAMPLES-• CASH AT CLOSING• SCHEDULED ANNUAL PAYMENT• REVENUE SHARING

• CONTRACT EXAMPLES-• CONCESSION• LEASE• BUILDER PROJECT DELIVERY SYSTEM


AVOID/MINIMIZE CASH OUTLAYS FOR NEW CAPITAL PROJECT OR OTHER NEEDS

• P3 IS AN ALTERNATIVE TO RAISING TAXES OR CUTTING SERVICES

• TRANSACTION YIELDS CASH TO PRIVATE SECTOR EXAMPLES-• AVAILABILITY PAYMENTS• SHADOW TOLLS• RENT

• CONTRACT EXAMPLES-• CONCESSION AGREEMENT• LEASE• BUILDER PROJECT DELIVERY SYSTEM


BIG, REVENUE-GENERATING P3 PROJECT

• REGARDLESS OF WHO GETS PAID, SOME PROJECT REVENUES ARE USUALLY “MONETIZED” IN A FINANCING TO PAY CAPITAL COSTS

• CONTRACT IS LONGER TERM• PRIVATE SECTOR NEEDS TO RECOUP

INVESTMENT• 30-50 YEARS NOT UNCOMMON

• “EXIT RAMP” OR SAFEGUARDS FOR PUBLIC SECTOR NEEDED. EXAMPLES-• PERFORMANCE STANDARDS• STRUCTURE OF AVAILABILITY PAYMENTS



Project

OtherConstruction/Engineering

FirmsDeveloper/OperatorEquity Fund

Public Sector Owner

Public Sector Loan/Grant

Sources

PrivateDebt Providers

BIG, REVENUE-GENERATING PROJECT:Conceptual P3

P3 Agreement

“payments?”

“monetization” of project revenues

“equity?”

BIG, REVENUE-GENERATING PROJECT:How to Model ItTaken From: KeyBank- Identifying P3 Projects and Knowing the Atmosphere


Private entity owns all risks associated with facility. The public sector is merely the user or tenant of the facility.

Private entity has exclusive right to provide operate and maintain an asset according to performance requirements as set by the public sector. The public sector retains ownership of the original asset.

Private entity designs, builds, finances, operates and/or maintains a new facility under a long-term lease. At the end of the lease term, the facility is transferred to the public sector.

The public sector grants the right to finance, design, build, operate and maintain a project to a private entity. The private entity is not required to transfer the facility back to the public sector.

Private entity takes construction and financing risk. Public sector contracts with private entity to deliver constructed assets paid at completion or over time. Public sector to manage operating and maintenance.

The public sector contracts with a private entity to design and build a facility according to requirements set by the public sector. After completing the facility, public sector assumes responsibility for operations and maintenance.

Build-Own-Operate

Concession

Design-Build-Finance-Operate-Maintain

Design-Build-Finance-Operate

Design-Build-Finance

Design-Build

Deg

ree

of P

rivat

e Se

ctor

Ris

k

P3 Models

Degree of Private Sector Involvement

BIG, REVENUE-GENERATING PROJECT:How to Structure It


Sponsor A Sponsor B Sponsor C

SubcontractorOne Construction

SubcontractorTwo Construction

Technical Legal and Market

Advisors

Project CompanyConcession/Off-taker

Hedging and Working Capital Counterparties

Senior Lenders

Subordinated Lenders

Structure Example

Revenue Contract

Risk Transfer

Rated Senior Debt

Sub Debt

Taken From: Fitch – Rating Criteria For Infrastructure and Project Finance

Equity

BIG, REVENUE-GENERATING PROJECT: How to Finance ItTaken From: KeyBank- Identifying P3 Projects and Knowing the Atmosphere


Bank Finance• Senior debt finance by way of bank loans often constituting 75% to 90% of

required funding is generally done by a large number of banks under a “club” approach

• Mini perms and bridging facilities• Typically designed to be a 5-7 year, non-amortizing loan• Loan sizes have typically ranged between $50 and $150 million• Credit spreads are typically LIBOR + 200-300 bps but can step up to 400

bps• Canadian, European, Asian are market lenders – U.S. banks have now

enteredEquity• Share capital and sub-debt usually contributed by sponsors, often

constituting around 10% - 30% of the initial projected project cost, but can be higher based on the nature of the concession

• Developers, private equity funds and pension fundsMezzanine Finance• Finance ranking between the senior debt finance and equity• Typically, short term, subordinated debt, structured with cash interest, PIK

interest and equity participation• Can be from either commercial banks, private investors or federal/state

sources

Bond Finance• For qualified project, the private sector may issue tax-exempt Private

Activity Bonds. These bonds have many of the typical features of municipal bonds

• Taxable bonds may also be issued (structured with make-whole payments for early redemption)

• The bonds are normally fixed rate with a final maturity of 30 years or more and fully amortize from project cash flows (no need to refinance)

• Leases (lease/leaseback and sale/leaseback with tax exempt bonds) are used across multiple sectors including municipal facilities such as city halls, courthouses, schools, and administrative buildings

• US Investment Banks lead this marketFederal and State Loans and Grants• Fills capital gaps for secondary subordinated capital• Federal Transportation Infrastructure Finance Innovation Act (TIFIA Loans)

is to stimulate private capital investment in infrastructure• TIFIA is a subordinate lender, however, it come to parity with senior debt in

bankruptcy event• State Infrastructure Banks are a type of revolving infrastructure investment

fund for surface transportation projects will offer loans, credit assistance and enhancement products to public and private sponsors

State Infrastructure BanksAdvance Construction

Tax Exempt Revenue Bonds/Dedicated Sales Tax BondsTax Exempt General Obligation Bonds

Grant Anticipation Revenue Vehicles (GARVEE bonds)TIFIA Credit Program

Tax Exempt Private Activity BondsCommercial Loans/Taxable Bonds

Equity

P3 FundingConventional Financing

Public-PrivatePartnership Financing

P3 Funding Overview

P3 IS NOT FREE

• ANOTHER PUBLIC SECTOR P3 GOAL IS TO SHIFT RISK TO THE PRIVATE SECTOR• BUDGET RISK

• OBTAIN BETTER EFFICIENCIES AND ECONOMIES FROM THE PRIVATE SECTOR

• CONSTRUCTION RISK• OPERATING RISK


P3 IS NOT FREE

• PUBLIC SECTOR WILL ALWAYS HAVE “SKIN IN THE GAME.”

• EXAMPLE: GEORGIA’S NORTHWEST CORRIDOR MANAGED LANES PROJECT-• State Transportation Board selected Northwest Express Roadbuilders to build the

Northwest Corridor toll lanes project for $840 million• this budget more than $100 million less than original projections

• however, Georgia will provide another $241 million of total project costs (right of way acquisition, administrative expenses and the portion of the project to be performed by the State Road and Tollway Authority)

• FEDERAL HIGHWAY ADMINISTRATION: “P3 CONCESSIONS DO NOT GENERATE REVENUE, THEY REQUIRE IT.”


THE MIDDLE MARKET

• MUCH IS MADE TODAY OF P3 OPPORTUNITIES• IN REALITY, THE UPPER END OF THE MARKET IS

CONCENTRATED• THE MARKET IS DOMINATED BY A FEW OPPORTUNITIES

HANDLED BY A FEW PARTICIPANTS• BUT MANY OPPORTUNITIES EXIST IN THE MIDDLE

MARKET, CLOSE TO HOME FOR ECONOMIC DEVELOPERS, COMMUNITY DEVELOPERS, AND REAL ESTATE DEVELOPERS.

• EXAMPLES-


THE MIDDLE MARKET

• COMMUNITY DEVELOPMENT AND REDEVELOPMENT• Examples: • Monetization of property taxes to pay costs of infrastructure supporting

new City Hall. See “Teachable Moments.”• Use of TIF/TAD and NMTC to finance hotel as part of downtown

redevelopment. See “Teachable Moments.”

• STREET AND HIGHWAY INFRASTRUCTURE• Example: development authority road project to support new shopping

center. See “Teachable Moments”

• PARKING• Example: Park Atlanta parking enforcement contract with City of

Atlanta (contract amended for better customer service)


THE MIDDLE MARKET

• AIR TRANSPORTATION• Example: Illinois’ 2013 S.B. 20 allowing Illinois Department of

Transportation to use P3 for South Suburban Airport (Chicago regional airport in Will County)

• UTILITIES• WATER• Example: Bayonne, N.J. 2013 water and sewer plant privatization with

KKR and United Water

• TRADITIONAL PORTS• Example: master operating lease between Illinois International Port

District and Broe Group (up to $500 million investment in infrastructure serving Lake Michigan and Lake Calumet)


THE MIDDLE MARKET

• HIGHER PROFILE PUBLIC ASSETS• Example: Florida’s HB 85 for P3’s for “qualifying projects" that

include, among other things, “any ferry or mass transit facility, vehicle parking facility, airport or seaport facility, rail facility or project, fuel supply facility, oil or gas pipeline, medical or nursing care facility, recreational facility, sporting or cultural facility, or educational facility or other building or facility”

• PUBLIC SAFETY, JUDICIAL, AND CORRECTIONS• Example: private prisons- 48 correctional and detention facilities

operated (2011 statistics) by CCA in 15 states and the District of Columbia

• GREEN ENERGY• Example: 2013 solar installation for Georgia school district

financed in P4 structure. See “Teachable Moments.”


THE MIDDLE MARKET

• HIGHER ED• Example: University of Kentucky’s project (started 2012) with

Education Realty Trust for New Central Hall• MULTIMODAL TRANSPORTATION

• INLAND PORT• Example: MOU signed July 10, 2013 between Georgia Ports Authority

and Cordele Intermodal Services providing for a direct 200-mile rail route to and from GPA’s Garden City Terminal in Savannah serving southwest Georgia and adjacent regions of Florida and Alabama

• SPACE PORTS• Examples: Space Florida’s proposal for a commercial spaceport north of

Kennedy Space Center; Camden County, Georgia’s negotiations with SpaceX regarding commercial spaceport


“TEACHABLE MOMENTS”- City Center Redevelopment (public infrastructure and funding for City Hall)


“TEACHABLE MOMENTS”- ROAD FOR A NEW SHOPPING CENTER


Contractor

DeveloperConstitutionalAuthority

Bond

Tri-Party DevelopmentAgreement

1) County obligates SPLOSTproceeds to Authority2) Authority pledges County obligation to repayment of Bond3) Developer agrees to construct Project4) Authority and Developer convey title to the Project to the County

Landowners$ = Bond proceeds $ = purchaseprice

Projectconstruction

$ = contractsum

County

title to the road improvements

“TEACHABLE MOMENTS”- hotel for downtown redevelopment (with NMTC and TIF/TAD)

© 2013 Seyfarth Shaw LLP23 |

Investment Fund

DDASponsor

CityBank

SubCDE

Bondholder QALICB

$1.5M

Sub. Bond +Fund Note B

$2.5M

Fund Note A

Fund Note B

$1.5M

$2.5M IGA +Fund Note A

$2.5M TAD Bond

term sheetcollateral +

Sub. Bond +Fund Note B

positivetax

increment

$2.5M

$1.5Mequity

equity

$2.5M $1.5MNote A Note B

Guaranty of Fund Note B

“TEACHABLE MOMENTS”- SCHOOL DISTRICT SOLAR PROJECT


Bondholder

Bond proceeds Bond

DevelopmentAuthority

Vendor

Loan ofBond proceeds Note

Borrower Public FacilitiesAuthority

School District

infrastructure $

$ + rent operatingsublease

$ + debt service

operatinglease

MORE MIDDLE MARKET:US MILITARY- P4(public to public, for public to private)DEFENSE AUTHORIZATION ACT OF 2013, SEC. 331, INTERGOVERNMENTAL SUPPORT AGREEMENTS WITH STATE AND LOCAL GOVERNMENTS

(a) Agreements Authorized- Chapter 137 of title 10, United States Code, is amended by adding at the end the following new section:‘Sec. 2336. Intergovernmental support agreements with State and local governments

‘(a) In General- (1) The Secretary concerned may enter into an intergovernmental support agreement with a State or local government [includes local authority] to provide, receive, or share installation-support services if the Secretary determines that the agreement will serve the best interests of the department by enhancing mission effectiveness or creating efficiencies or economies of scale, including by reducing costs.

‘(2) Notwithstanding any other provision of law, an intergovernmental support agreement under paragraph (1)--

‘(A) may be entered into on a sole-source basis;‘(B) may be for a term not to exceed five years; and‘(C) may use, for installation-support services provided by a State or local

government, wage grades normally paid by that State or local government


MORE MILITARY P3

Other military procurement authorities: • Power Purchase Agreement (10 USC 2922a)

• Example: May 9, 2013 DLA Energy agency RFP for 15MW of solar generation at Ft. Irwin, CA

• Energy Savings Performance Contracts (42 USC 8287) • Energy Services Agreement (42 USC 8256)• Enhanced Use Lease (10 USC 2667)

• Example: private hotel on military base• Easement Authority (40 USC 1314) • Cooperative Agreements (31 USC 6305)


2 P3, OR NOT 2 P3?That is the question!

• Biggest execution risk: political will• How to deter private sector partners:

• Have an inadequate or opaque legal system

• Field an inexperienced, poorly advised team

• Worst of all- Second guess a project and cancel it after the private sector has incurred substantial “pursuit costs” but before award

© 2013 Seyfarth Shaw LLP27 |

HOW 2 P3

1. PUBLIC SECTOR CHAMPION – THIS IS A GOT TO HAVE! NO ADVOCATE? NO CLOSING!2. STATUTORY ENVIRONMENT – DOES STATE LAW ALLOW P3? IS IT CLEAR ABOUT P3? DOES IT ALLOW UNSOLICITED PROPOSALS? DOES IT PROTECT PROPRIETARY INFORMATION?3. PUBLIC SECTOR’S ORGANIZED STRUCTURE –DOES THE _PUBLIC SECTOR_ HAVE A TEAM? IS IT ANY GOOD? DOES THE PUBLIC SECTOR PRIZE PRICE OVER VALUE OR PROCESS OVER RESULTS?


HOW 2 P3

4. DETAILED CONTRACT (BUSINESS PLAN) –ARE THE DEAL DOCUMENTS GOOD ONES? IS DISPUTE RESOLUTION COVERED IN A WAY THAT DISPUTES DON’T TRIGGER DISASTER? REMEMBER- GOOD CONTRACTS ARE NEEDED HORIZONTALLY (AMONG PRIVATE SECTOR TEAM MEMBERS) AS WELL AS VERTICALLY (BETWEEN THE PRIVATE SECTOR AND THE PUBLIC SECTOR).5. CLEARLY DEFINED REVENUE STREAM –REMEMBER: PROJECT REVENUE MUST BE MONETIZED TO PAY PROJECT COSTS. REVENUES MUST BE IDENTIFIED AND BE LEGALLY AVAILABLE. AND THEY MUST BE SUFFICIENT!


HOW 2 P3

6. STAKEHOLDER SUPPORT –YOU CAN’T P3 IN A VACUUM. ENGAGE YOUR STAKEHOLDERS. REMEMBER THAT THE AFFECTED WORKERS ARE ALSO VOTERS!7. PICK YOUR PARTNER CAREFULLY – WHAT’S THE MOST IMPORTANT PART OF P3? PICKING YOUR PARTNER! THE PARTNER MUST BE CAPABLE-FINANCIALLY, AND OTHERWISE. THIS RULE APPLIES BOTH HORIZONTALLY AND VERTICALLY.

GOOD LUCK ON ALL YOUR P3 PROJECTS!



QUESTIONS?

If you have any questions or comments on this presentation, please do not hesitate to let me know.

Daniel M. McRae, PartnerSeyfarth Shaw LLP

1075 Peachtree Street, N.E.Suite 2500

Atlanta, GA 30309404.888.1883

404.892.7056 [email protected]@danmcrae.info


REFERENCES

THIS PRESENTATION AND OTHER REFERENCES CAN BE DOWNLOADED AS FOLLOWS:

• March 2013- “The DNA of Your DDA”• January 2013- “Development Authorities 101”• November 2012- "In-Sourcing Capital: EB-5 Loans and Equity; NMTC Tax Credit

Equity; and Non-Recourse Project Finance Bonds“• August 2012- “Bonds 101”• June 2011- "TIFs and TADs in Tough Times“; TIFs and TADs Questions and

Answers• August 2010 – "Bonds For Title"at http://danmcrae.info/whitepapers• February 2013 – Quick Takes: “Projects – Money Comes Knocking”• June 2011 – Quick Takes: “Easy Equity – the NMTC and EB‐5 Programs”• January 2011 – Quick Takes: “After ARRA – What Bonds Can We Use Now to Finance

Projects?”at http://danmcrae.info/quicktakes


MORE INFORMATION

This presentation is a quick-reference guide for elected and appointed officials and their staffs, company executives and managers, economic developers, participants in the real estate and financial industries, and their advisors. The information in this presentation is general in nature. Various points which could be important in a particular case have been condensed or omitted in the interest of readability. Specific professional advice should be obtained before this information is applied to any particular case. Any tax information or written tax advice contained herein is not intended to be and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. (The foregoing legend has been affixed pursuant to U.S. Treasury Regulations governing tax practice.)

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P3- UNDERSTANDING PUBLIC/PRIVATE PARTNERSHIPS

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